Sanmina-SCI Corporation — Q2 FY2011 Form 10-Q
Reporting period: Quarter and six months ended April 2, 2011. The company provides electronic manufacturing services (EMS) to OEMs across communications, industrial/defense/medical, enterprise computing/storage, and multimedia markets. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $1,569.1 | $1,527.5 | $3,231.5 | $3,005.8 |
| Gross profit / margin | $116.8 / 7.4% | $117.5 / 7.7% | $244.9 / 7.6% | $227.2 / 7.6% |
| Operating income / margin | $44.6 / 2.8% | $45.2 / 3.0% | $105.6 / 3.3% | $84.9 / 2.8% |
| Net income | $13.1 | $10.1 | $41.4 | $69.5 |
| Diluted EPS | $0.16 | $0.12 | $0.50 | $0.85 |
| Operating cash flow | — | $104.5 | $(19.2) |
Q2 sales rose 2.7% year over year, while management said sales declined sequentially from Q1. Six-month sales increased 7.5%. Communications was the principal growth driver: Q2 sales rose 39.1% year over year; enterprise computing/storage fell 23.6% and multimedia fell 31.5%. Six-month communications sales increased 49.3%, while enterprise computing/storage and multimedia declined 25.7% and 24.2%, respectively.
Cash from operations was $104.5 million; investing activities used $54.9 million, including $54.8 million of capital expenditures; financing activities provided $14.7 million. Cash and cash equivalents were $654.7 million at quarter-end, up from $592.8 million at October 2, 2010. Working capital was $1.4 billion. The cash cycle lengthened to 55 days from 47 days at fiscal year-end, with DSO of 56 days, inventory turns of 7.0, and accounts payable days of 53.
At April 2, 2011, current assets were $2.576 billion and current liabilities $1.150 billion. Short-term debt was $61.9 million and long-term debt $1.240 billion; total debt was approximately $1.302 billion. The next long-term debt maturity is in 2013. The company reported $146.3 million of availability under its $235 million asset-backed facility and $23.1 million available under $85 million of foreign short-term facilities. It was in compliance with debt covenants.
Changes versus comparable periods
- Q2 gross margin declined 0.3 percentage points year over year; operating income was slightly lower despite higher sales. Management attributed margin pressure to reductions in revenue at certain plants, unfavorable customer mix, and costs that could not be reduced quickly enough; components operations partly offset this.
- Six-month operating income improved to $105.6 million from $84.9 million. Six-month net income fell to $41.4 million from $69.5 million, largely because the prior-year period included a $35.6 million litigation settlement and a $12.3 million tax benefit from resolving an uncertain tax position.
- Cash from operations improved from a $19.2 million outflow to a $104.5 million inflow, supported by lower receivables and inventory. Accounts payable also declined, reflecting purchase timing.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management expects margins to fluctuate with production volumes and customer/product mix, and believes cash resources, available facilities, and operating cash generation will cover working capital needs for at least the next 12 months.
- Management reported the sixth consecutive profitable quarter. Q2 profitability was affected by delayed defense projects and shipments amid U.S. federal budget uncertainty, a resolved labor strike in India that delayed shipments, and a short-term optical-market inventory correction. It also cited softening multimedia demand, weaker communications demand in Q2, and ongoing competition, excess capacity, and operating-efficiency challenges.
- The company said the Japan earthquake and related nuclear situation had not significantly affected results to date, but future effects were uncertain. Component supply and pricing, customer order volatility, concentrated customer exposure, foreign operations and currency movements, labor costs, and pricing pressure are material risks. The ten largest customers generated 48.7% of Q2 sales and 48.8% of six-month sales.
- Unusual and contingent items include $54.0 million of long-term unrecognized tax benefits, $19.5 million of reserves for litigation and other contingencies, and $4.3 million accrued restructuring costs. The 2010 restructuring plan could cost up to $15 million in total; $8.5 million had been incurred. The company expects most restructuring accruals to be paid by year-end 2011. It also expected to pay $8.2 million of remaining BreconRidge purchase consideration by November 29, 2011.
Important facts for investors to verify
- Whether the sequential demand softness, defense delays, India labor disruption, and optical inventory correction persist or reverse.
- Whether sales growth can translate into improved gross margins, particularly as customer mix and plant utilization change.
- Availability and cost of components, and any lasting business or supply-chain effects from the Japan disaster.
- Working-capital trends, facility availability, and refinancing or repayment plans ahead of the 2013 long-term debt maturity; the $61.9 million of short-term borrowings is due within 12 months.
- Resolution and potential cash impact of the $54.0 million uncertain-tax-position liability, litigation matters, and remaining restructuring and acquisition payments.